It was sometime in the 1960's. My uncle was teaching in Bulgaria. He wanted to buy stuff in Britain, but wasn't allowed to take much money out of Bulgaria. My father was farming in Britain. He wanted to buy stuff in Bulgaria, but wasn't allowed to take much money out of Britain.
My uncle and father thought up a Cunning Plan. My father went to Bulgaria, where my uncle gave him money, and my father bought stuff. My uncle went to Britain, where my father gave him money, and my uncle bought stuff.
The Cunning Plan was possibly illegal? But it was Pareto Improving. My uncle preferred buying British stuff to buying Bulgarian stuff. My father preferred buying Bulgarian stuff to buying British stuff. The Bulgarian government wouldn't care whether it was my uncle or my father buying Bulgarian stuff. The British government wouldn't care whether it was my father or my uncle buying British stuff. (Even if they had hoarded money, instead of buying stuff, I can't see why either government would care whether it was my uncle or my father hoarding the money.)
The Cunning Plan was economically equivalent to barter. It was exactly as if my uncle had bought Bulgarian stuff, my father had bought British stuff, and then the two had swapped the stuff.
The Cunning Plan worked because my uncle and father knew each other, and trusted each other. What was needed was some sort of internet dating site, so that people like my uncle and my father could find each other, with the host checking that both sides could be trusted. But the dating site would need to be open to threesomes too, for cases where someone in Albania wants to buy stuff in Britain, someone in Britain wants to buy stuff in Chad Cyprus, and someone in Chad Cyprus wants to buy stuff in Albania. Or foursomes. Or orgies with all sorts of people from all sorts of countries taking part to greater or lesser extents.
What would happen if there were more farmers in Britain wanting to meet teachers in Bulgaria than vice versa? You would need some sort of price to adjust, so British farmers would get a worse deal, which would discourage some, and Bulgarian teachers would get a better deal, which would encourage some more.
If the British or Bulgarian governments tried to fix the price in that dating market, that would cause problems. There could be an excess demand or excess supply. Which would create all sorts of problems, and lead to rationing, because some British farmers or Bulgarian teachers wouldn't be able to find a partner. So the governments might need to decide who gets priority in finding a partner. And then people would start to think up even more Cunning Plans to get round those government decisions.
Or, we could forget all about exchange controls and Cunning Plans, and just have flexible exchange rates.
Worthwhile Canadian Initiative 
Sometimes it is worth to take a look at “What did I say exactly?”
http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/03/deposit-insurance-bank-runs-international-currencies-and-the-inflation-tax.html?cid=6a00d83451688169e2017ee9979cbf970d#comment-6a00d83451688169e2017ee9979cbf970d
There was this lecture, that was put in scence in a lecture hall of senior law students, and then they were asked about what they believe to have seen ….
Anyways, as Cyprus law inforcement I would definitely like to have former central bank governor Orphanides for interrogation. Does Canada extradite people for financial crimes?
Israel and Germany were the last holdouts who officially said: we don’t extradite any citizen for any reason, but both changed in the mid 2000’s.
http://www.edmundconway.com/2013/03/how-britain-flirted-with-cyprus-style-wealth-raids/
Hear, Hear,
Keynes and Hayek agree on something, and a Barry Eichengreen paper : – )
Simon,
BTW, I did my master’s thesis on the role of international capital flows during current account crises, so I’m sure I’ll have a lot of fun analyzing your plan.
And returning to the subject of large depositors suffering losses (to answer your specific question).
I think it happens now and then when small banks go bankrupt, but Cyprus is the first case when it happens to depositors of a systemically-important bank – that’s the most important difference. Whether it will become the new Eurozone-wide policy remains to be seen.
Sorry for my absence…been working. Yes, my long reply was stuck in the spam filter for a bit more than a day (Nick was taking a break for Easter.)
Dr. Why: I see you’ve now disavowed your earlier statement that haircuts for depositors of the type you are seeing around you are typical in eurozone bank restructurings. Just so you know, major media outlets have consistently reported that these are the first depositor losses in any eurozone bank restructuring. (I know of no counterexamples: let me know if you find one.)
As for your master’s thesis…..if you’ve studied this, then why do I have to waste my time spelling this out for you? Did you learn nothing? Why would you start with an exogenous current account that needs to be financed? How could you not know that current accounts change in a crisis? Did you forget? Was your education that bad? Did you have a severe head trauma? What?
“Sometimes it is worth to take a look at “What did I say exactly?””
I have to admit, I’m pretty skeptical about this claim of yours. But let’s try: please give us a link to the Cyprus court documents charging the former governor of their central with treason. (I’d settle for a link to an arrest warrant or interpol notice specifying the name and the charge.)
Until then, I think your claim is overstated.
Simon,
1)I did not say it was typical for Eurozone bank restructuring – I said that’s what happens in a bankruptcy. And I explained why in this particular case the depositors suffered such huge losses. I can’t give you specific precedents because bank supervision is national and there are almost ten thousand banks in the EU, but it is certainly supposed to happen within the current regulatory framework (and I think it occasionally happens in the US).
2) Before I give you a detailed answer tomorrow: do you realize how much financing can be provided by the ECB? For Cyprus the total figure is probably about 30 billion euros at 0.75% – that’s about 200% of GDP. A country with independent currency would not be able to benefit from such a source of funding and at such a low rate, which would make structural adjustment much more difficult.
3) Ad hominem arguments are counterproductive. To me, at least, you so far have not demonstrated sufficiently good understanding of real-world issues (e.g. the role of the ECB in controlling capital flight, extremely limited potential for import substitution in a country like Cyprus etc), so don’t expect me to treat you with a lot of respect just because you are teaching a graduate course or because I have some famous classmates or teachers.
I mean because YOU have some famous classmates and teachers.
Anyway, I’ve got no reputation to lose, but you have, so let’s be polite and objective.
Simon,
the link I gave above, goes to some other place in the WCI blog file system, no wonder you are confused / irritated about it.
After spending about 1 hour trying to figure this out, I gave up. I believe there are more problems with the blog setup, than just some somewhat erratic spam filter.
What I refered to as my own uttering, was
“If my explorative interpretation is correct, they just killed some 25% of their GDP, possibly 50%, resulting in, according to IMF 120 % GDP debt numbers rules, to wipe out 30 – 100 % of the cash assets there, roughly. And not just some 10% fee.”
written “March 20, 2013 at 01:01 PM”
Simon,
you went up for the defense of your colleague Krugman,
similar to what I did for my “Austrian (Schluchtenscheisser) Brothers and Sisters”,
AFTER I did check my short hands for their credit quality (e.g. 10 year rates).
This is good and laudable.
It also means, that you have constraints in public discussion, neither Dr_w and I have, making the discussion very asymmetric.
I count now something like 5 times of misunderstandings, where I say “as Cyprus law inforcement I would definitely like to have former central bank governor Orphanides for interrogation” and you interpreting me to have detailed knowledge of an already existing “arrest warrant”
If I would have detailed knowledge, I certainly wouldn’t discuss it here, not before he is in the firm hands of European law enforcement.
And I hope you told your friend to get his family out, because this summer is getting ugly. The mob in the streets might not want to discuss the fine points of economic theory of a central bank, but more, where is the next tree.
Dr. Why:
“I did not say it was typical for Eurozone bank restructuring – I said that’s what happens in a bankruptcy.”
Quite so. And, although many banks in Euroland have gone bankrupt or restructured in recent years, what you say is “typical” does not seem to have been happening. I do not know why you originally said it was typical. I do not know why you don’t abandon that claim. I’d be surprised if you can find evidence to contrary (but, as I’m sure you’ll agree, I don’t know everything.)
As for respect, I’m not asking for it (this a blog comment thread, right?) Are you? I’ve watched you make several statements that were clearly untrue (including a phrase you put into quotes saying Krugman had written it when that was not true.) When people show me that I’ve made a mistake, I say “You’re right!” What do you do?
“I mean because YOU have some famous classmates and teachers.”
I mentioned them because Genauer was asking about Krugman and his original contribution; I explained the limits of what I knew about that.
“Anyway, I’ve got no reputation to lose, ”
No, anonymous lurkers like yourself certainly don’t….so why bring your master’s thesis into it?
Dear Genauer;
You misunderstand. I had no interest in your earlier claims. I was casting doubt on the worth of looking back at things you wrote. As an example, I offered your statement “Will the US extradite Orphanides when he is wanted at home for treason?” In english, this seems to suggest that Prof. Orphanides is a fugative from justice. I asked for any concrete evidence supporting such a claim. I’m not really sure you would be against linking to public court records (the reasons you offered did not make sense to me) but I’m sure it makes sense in your little private world.
I put your “brothers and sisters” defense of the Austrian banking system in the same category: lots of heroic assumptions and it flies in the face of expert Austrian commentary….but if that’s what you really want to believe, I can only suggest that you invest in Austrian banks if you have not done so already.
But I know I owe you a Krugman article. (I’ve been busy coding and working on a research paper most of the weekend.) How about his speculative attack on fixed exchange rate regimes paper? I used to know that one and can say some things about how it fit into the literature.
Simon,
“When people show me that I’ve made a mistake, I say “You’re right!” What do you do?”
I clarify my position. If Krugman first strongly attack the ECB in late 2011, and later uses a cagey phrase like “I now think a breakup of the euro, with major players, not just Greece, being forced out, is up to more or less even odds” – I interpret it as “the euro could disappear before the end of 2011” and I admit it’s my interpretation. If I’m not sure something actually happened but in principle it should happen (depositor losses) I usually modify my statement with “I think”,and then clarify what I meant.
“so why bring your master’s thesis into it?”
Why not – it’s relevant to our current debate (current account crises vs adjustment within a common currency area) and shows that I have at least some theoretical background. So when I criticize your theoretical model, you should not assume that I simply misunderstood it, but rather that I have doubts about its real-world validity.
Simon,
“And, although many banks in Euroland have gone bankrupt or restructured in recent years, what you say is “typical” does not seem to have been happening.”
Where did I say it was typical for the Eurozone? I said “that’s what a bankruptcy/restructuring looks like”. If other Eurozone countries chose not to take a normal bankruptcy path(at least in other high-profile cases), or depositors just got lucky, it is a different issue.
Simon,
“No, anonymous lurkers like yourself certainly don’t..”
I use a consistent identity, and I provide some personal background if I feel it is relevant, but I have pretty good reasons to remain anonymous and it has nothing to do with my reputation in economics – or lack thereof.
OK, to add a bit of realism to your model, let’s start with bank balance sheets and consider two exit scenarios:
1) Soft scenario: no conversion of existing asset/liabilities (including government debt)
2) Hard scenario: conversion of all assets/liabilities (except interbank loans) to pounds
Scenario 1:
If revenues and real asset prices are set in local currency then after a strong depreciation most borrowers will find themselves underwater and/or not being able to service their debt and will default on their loans. With an initial 50% depreciation of the currency (totally realistic, given uncertainty and capital flight), total loans at about 400% of GDP and loan-to-collateral-value ratio already close to 100%, we might easily expect losses on the order of 100% of GDP or more. However, the central bank’s and the government’s ability to provide liquidity and recapitalize the system would be limited by demand for (rapidly depreciating) local currency and financial assets denominated in local currency. Monetary base would most likely be below 10% of GDP, while the level of publicly held government debt denominated in local currency may be only slightly higher, and so the government may not be able to recapitalize the banking system without triggering a currency collapse and hyperinflation.
Scenario 2:
If interbank liabilities (loans from the ECB) are at 100% of GDP (e.g. Laiki alone was able to borrow about 50% of GDP), then after an initial 50% depreciation banks will lose the same 100% of GDP as in Scenario 1 (euro-denominated debt goes form 100% of GDP to 200% of GDP) . However, this scenario is even scarier because the public now has a lot of local currency deposits which it is not willing to hold, so the exchange rate may continue to decline as depositors try to get their hands on foreign currency. If the CB responds with currency controls, then the public will most likely switch into buying real assets/goods, triggering hyperinflation. If the CB tries to increase short-term rates, this will create another huge problem for banks, which have long-term assets and short-term liabilities.
On the other hand, if Cyprus stays in the Eurozone, there may be a slow decline in revenues and real asset prices, but the deleveraging process will be much smoother and less disruptive.
Now, the current account.
First, inside the eurozone.
Lets’ consider a relatively painful scenario where we have a strong growth in exports in line with foreign NGPD (a 5% growth rate) and fixed imports (fixed domestic NGDP) – in this case Cyprus’s trade will become balanced within five years (with import currently at 40% of GDP and imports at 50% of GDP), and until that point Cyprus will need total additional external financing of about 30% of GDP, which can be easily provided by the ECB. If we fix real domestic GDP, then balancing the trade will take a bit longer (maybe 8 years) and total external financing will be close to 50% of GDP, which is still within the ECB’s lending limits (even if we take into account capital flight). However, if we also consider natural gas, the adjustment scenario may be even smoother and virtually painless.
On the other hand, outside of the eurozone, it’s not clear whether Cyprus will be able to run a current account deficit at all.
Currency controls can usually be circumvented by using international trade contracts, while borrowing in foreign currency may be very problematic (no ECB with cheap loans), so Cyprus may find it very hard to obtain enough currency to pay for imports and be forced to quickly move from a large current account deficit to a current account surplus, which means a huge decline in domestic GDP (assuming little potential for import substitution), bankruptcies and a surge in unemployment.
In other words, instead of a slow adjustment over a period of 5-10 years, there will be a very rapid adjustment with huge additional costs. (And, to make matter worse, let’s not forget that in this scenario Cyprus will also have a bankrupt banking system.)
Nick, could you please fish the second part of my reply out of the spam box?
The Eurozone rescue package (60% of GDP) will also help to some extent to finance the current account deficit. However, since those intergovernmental loans will reduce the level of publicly held Cyprus government debt, this will reduce the limits on borrowing from the ECB (since government bonds are used as collateral), so the net effect on total eternal borrowing may be not very big.
To summarize:
1) If Cyprus stays in the eurozone it will probably experience about 5 years of zero growth and 15-20% unemployment (maybe less if the unemployed more somewhere else or retire), but the banking system will survive, the savings will remain intact and the standard of living will be maintained.
2) If Cyprus leaves the eurozone, its banking system will be bankrupt; the GDP, employment , the standards of living and the real value of savings will collapse; and inflation will be in the double digits even in the best case scenario (considering that imports are at 50% of GDP).
Simon,
could you get a little bit more specific about what you called my “lots of heroic assumptions …”?
I had provided hard, linked, market data. interest rates, loan to deposit ratios, …
Doctor_Why,
I pretty much agree with your analysis.
And imagine, if a German would have written it that way, what howling we would see.
Dr. Why:
Thanks for your detailed responses. I’ll wait until tonight (my time) in the hopes of getting the spam-filter-trapped portion of your answer so that I can read it all at once.
Simon,
Nick has already saved it, so there’s nothing more (actually, I have some more stuff, but I decided not to post it for now).
genauer: regarding your posts on Austrian banks
Your comment at March 17, 2013 at 05:53 PM seemed to have confused reliablity of banks with the interest rates on govt. debt.
Your comment at March 17, 2013 at 07:02 PM contained the reference to “excellent countries like Czech, Poland”, effectively ignoring their macroeconomic risks (and further assumed such risks were well-diversified in the banks’ portfolios.) In that post you also seem to be arguing (1) that the investments are low risk, (2) the investments are high-yield, and (3) “I am pretty sure that their risk premium, as reflected in their yield, reflects the risk.”
Your comment at March 18, 2013 at 11:19 AM aruges “the Loan to Deposit ratio of their their CESEE business is 105.8%. So nobody has any interest to do stupid things. (105.8% – 100)x 216 /308 = 4.1% GDP maximal potential risk exposure from CESEE” This assumes that losses on loans are covered by assets in deposits. You again seemed to have trouble with the risk/return relationship when you stated “you have to go some risk, if you want return, and long term growth in new markets.” (Recall this was the post that you finished with the comment on Cypriots “Let them sleep one more night about it, and everybody will find that he got a very good deal.” Prophetic, that was.)
I think that’s most of what you said about Austrian banking, but let me know if you think I missed substantive portions of it.
Now, I’m content to let you think what you want about Austrian banks: you’re an anonymous non-economist with a “Deutschland über alles” mindset who is convinced of his own deep insights (this is an economics blog comment forum — we all are!) Think what you like – it’s a free internet. I mentioned it only so that you might understand why others are perhaps not as interested as you in looking up your vintage comments…others may find them to be of less enduring value than you do.
last friday closing numbers:
Canada 10 year yield:
http://www.bloomberg.com/quote/GCAN10YR:IND 1.84%
Czech 10 year yield:
http://www.bloomberg.com/quote/CZGB10YR:IND 1.85%
For a tiny country, not covered by the Euro, which left communism just 23 years ago,
a truly excellent achievement.
And you are talking about “effectively ignoring their macroeconomic risks”.
What does a Canadian Prof, with no skin in the game, see, and the folks lending the Czech 49% of GDP dont see?
http://epp.eurostat.ec.europa.eu/portal/page/portal/excessive_imbalance_procedure/imbalance_scoreboard
Biggest austrian bank:
Data end of 2012
http://www.erstegroup.com/de/Investoren/Finanzkennzahlen;jsessionid=Qy1ZRhLLctLJ7vxQhVCJ2rzHfQ2ZpGHDBG2KZBCT2bYrGlJKTJPn!1931960091
Cash-Eigenkapitalverzinsung 7,6%
hard market data, and not “Ad hominem arguments” like Dr_why said above.
Again, Genny, you conflate govt. bond yields with macroeconomic risks to banks’ loan portfolios. To take just one example, perhaps you are aware that the US has had low bond yields and at the same time had shaky banks with macroeconomic risks in their portfolios.
Was the irony of your last two comments intentional?
– “What does a Canadian Prof, with no skin in the game, see…”
– “not “Ad hominem arguments” like Dr_why said above.”
I see you have decided not to defend your simultaneous claims of “high yields” “low risks” and “correctly priced risks”. So are you arguing that the 7.6% RoE “hard market data” that you mention above is a low return indicative of low risk? or a high return indicative of high risk? 😉
To further defend the good name and credit quality, not only of german speaking family, but other good neighbors as well:
1. Poland and Czech
I live pretty close to Czech (20 km) and Poland (50 km).
Sometimes, in summer, I even start the day with a bicycle trip from there, before getting to work.
Just 8 years ago, some streets there, I could not avoid, were sewn with whorehouses, and on the bike trails I had to see too many filled condoms. Not any more.
It reminded me somewhat of Annina Brandel talking to Captain Renault in Casablanca.
It makes me so happy to see my neighbors prosper, based on their own hard work, diligence, discipline, and not from EU handouts, like some southern countries.
When I listen today to the foreign minister of Poland, Sikorski, giving advice to his anglo friends in Oxford, or the Central bank chief of Poland (recently at TE (the economist), I see and hear some justified pride and significant confidence in the future, not fear of the western neighbor or inferiority complexes.
Just 5 weeks ago the Czech prime minister Necas came to the Parliament of Bavaria, which is now home to the Sudeten, who lived for many hundreds of years in what is now Czech, we call them our 4th tribe (Bavarians, Suebians, Franconians, Sudeten)
What do you see? I see somebody, who is completely confident to speak as an equal, who can then also recognize that it was not just simple black and white in 1945. And he got some well deserved, long, standing applause for that.
„Nečas nannte die Sudetendeutschen mehrfach “unsere deutschen Landsleute” „
2. Banks
When I compare market quotes of C, JPM, BAC and Austrian banks like Erste Group, Raiffeisen, over the last years, 5, 10, 15, the preference is very clear.
But I sold the last specific banking stocks some 5 years ago. Buffet rule: don’t buy what you don’t understand.
To adress Simon’s recent claim of “your simultaneous claims”:
If I would see a significant discrepancy between risk and return, in the market, I would invest in it, and not discuss it here. As far as I see this blog is not zerohedge or calculatedrisk, or some other outlets for rumour mongering for that kind of talk.
“…not “Ad hominem arguments” like Dr_why said above.”
“To further defend the good name and credit quality, not only of german speaking family, but other good neighbors as well…”
ROTFL: Genny, I can think of no finer example of an “Ad hominem” argument than your stirring patriotic defense of your “german speaking family”.
As for your “hard” market data, you really should try to answer the question: are you saying the rate of return is quite low (so the risk must be low?) or quite high (i.e. high risk?) or that the rate of return tells us nothing about the level or risk (in which case, what does it tell us about banking risk?)
Do you understand the difference between the riskiness of a bank’s loan portfolio and the rate of return on a country’s bonds?
Dr. Why: Sorry, just realized that all your previous posts are up and out of the spam filter. I’ll write some responses.
Simon,
what part of
“compare market quotes of C, JPM, BAC and Austrian banks like Erste Group, Raiffeisen, over the last years, 5, 10, 15” dont you understand?
the
– compare
– market
– banks
or are C, JPM, Erste Group funny words to you ?
Simon,
you have tried here, repeatedly, to trash talk Austrian banks. Fair game , in places like zerohedge.
How about you take a specific one of the largest 3, and then do this specifically, based on the information you have / can obtain?
Maybe, as a lecture for your students, in comparison to one of the largest 3 in America?
Dr. Why: I agree with you that EMU-exit without redomination into CYP (INCLUDING inter-bank loans) will be punatively disruptive. (I have to say, though, that I did not appreciate the size of the banking sector’s liabilities to the ECB.) Throughout, I’ve been assuming a unilateral legislatively-forced redenomination of all existing contracts into CYP (and at the pre-devaluation parity.)
Regarding hyperinflation, don’t forget that while the increase in the monetary base might seem alarming, this is the context of massive deleveraging which is simulataneously collapsing the monetary multiplier. While short-term currency controls make sense during the transition, I don’t agree that the public shift from money into hoarding real goods is likely to be nearly as widespread as you suggest and I don’t think that this was the experience when, for example, the Argentine currency board collapsed and Argentina defaulted on its debt (to take one example.)
Genny: on this side of the atlantic, quoting the central bank’s assessment of its own banking sector is not considered “trash talking.” Perhaps you should look up what that phrase means before you use it again.
Speaking of Austrian banks, I see you quoting the Buffet rule (Don’t invest in businesses you don’t understand) to explain why you are not investing in them. Yet you are confident enough to ignore expert assessment (not mine! the regulator’s!) of their risk exposure. That’s……very…..confident. At the same time, you (seem to?) object to those with no “skin in the game” talking about Austrian banks. Do you know the english expression “the pot calling the kettle black”?
In case you’re still wondering what a distant foreigner sees that “the folks lending the Czech 49% of GDP dont see?”
– I don’t see brothers and sisters
– I see what the ÖNB thinks of their own banks.
Dr. Why: Current Account.
I agree with you that, so long as the ECB is happily financing a substantial CA deficit, it causes less short-term disruption for the Cypriot economy to keep adding debt. If this is debt on which the country eventually defaults, then this is basically free consumption courtesy of other EU taxpayers. Default and EMU exit is an option whose exercise can then be rationally delayed until such time as the free gifts end. I had assumed in the previous comments that the $10B restructuring aid would be the last of the financial support. I still do not know the time frame over which this is to be paid. Any news on that?
Of course, the other consideration is that while the ECB can “easily” give 30% (or more) of GDP in financial support, they may choose not to. The Troika could “easily” have been more generous to Cyprus in restructuring aid. They choose not to be. Correct me if I’m wrong, but isn’t it hard to predict the total amount of aid that Cyprus can hope to extract from the EU and ECB?
Have you thought about the best course of action for Cyprus once the unilateral transfers stop, the country must finance itself and its own current account? It is, you know, an “independent” nation, isn’t it?
Simon,
“It is, you know, an “independent” nation, isn’t it?”
No, it isn’t. Not in any meaningful sense of the word.
It’s a divided country, whose government is not recognized by its most powerful neighbor (Turkey); its economy is so closely interconnected with the rest of the world that there is no real “domestic” economy to speak of; it has a very large population of foreign citizens (at least 20% according to the last census); and the reach of its legal system is limited because of the EU membership (and because of the globalized nature of its economy).
So, if we look at the problem from this perspective, it makes sense to ask why would a county like this need a national currency in the first place?
Simon,
I’ll try to keep my comments short so as not to fall foul of the spam-filter.
“Throughout, I’ve been assuming a unilateral legislatively-forced redenomination of all existing contracts into CYP”
But is it a good assumption? As I said, the reach of the Cypriot law is limited, and we should not expect it to apply to international contracts (like loans form Greek banks). In the specific case of the ECB loans, the situation is more complicated because the Eurosystem includes the ECB and the national central banks, so an ECB loan is actually a loan from the national central bank to a local commercial bank (so it can in principle be converted to pounds). However, when the national central bank makes such a loan, it increases its intra-Eurosytem liabilities, so converting the ECB loans to pounds would bankrupt the national central bank, rather than commercial banks.
“Regarding hyperinflation, don’t forget that while the increase in the monetary base might seem alarming, this is the context of massive deleveraging which is simulataneously collapsing the monetary multiplier. While short-term currency controls make sense during the transition, I don’t agree that the public shift from money into hoarding real goods is likely to be nearly as widespread as you suggest and I don’t think that this was the experience when, for example, the Argentine currency board collapsed and Argentina defaulted on its debt (to take one example.)”
Don’t forget that about one-half of all deposits belong to non-residents, who would have no use for CYP. If you combine this fact with heavy dependence on imports (50% of GDP compared to 15% of GDP for Argentina) and general capital flight, the threat of a currency collapse and hyperinflation looks very real.
“Correct me if I’m wrong, but isn’t it hard to predict the total amount of aid that Cyprus can hope to extract from the EU and ECB?”
As long as a bank has adequate capital and adequate collateral, the ECB should be willing to lend to it. If we assume that a bank would normally be able to borrow about 50% of its assets, then the limit on borrowing from the ECB would be about 200% of GDP (30-35 billion euros). At the end of January, total ECB loans to Cyprus banks stood at 9.1 billion euros (slightly over 50% of GDP), but now I think it must be closer to 100%, so there must be still a reserve of about 100% of GDP. As for the government, if we add the outstanding loan from Russia (2.5 billion euros) and the Eurozone rescue package (10 billion euros at 2.5-2.7% repayable in 12 years, with a grace period of 10 years, according to the latest government info), that would add up to a total external financing of about 75% of GDP.
“Have you thought about the best course of action for Cyprus once the unilateral transfers stop, the country must finance itself and its own current account?”
In one of my previous comments I described a scenario where Cyprus balances its trade in about five-years’ time (with zero economic growth), so that’s one possible answer.
“I agree with you that, so long as the ECB is happily financing a substantial CA deficit, it causes less short-term disruption for the Cypriot economy to keep adding debt. If this is debt on which the country eventually defaults, then this is basically free consumption courtesy of other EU taxpayers”
In the short-term, the Troika is supposed to make sure that the level of debt is sustainable (using forecasting models they have). In the long-term, nobody knows what level of debt is sustainable – it depends mostly on global economic trends – and a default is certainly possible, but we’ll cross that bridge when we get to it.
And still one of my comments was caught by the spam filter, so I’ll try to break it down into two parts:
“Correct me if I’m wrong, but isn’t it hard to predict the total amount of aid that Cyprus can hope to extract from the EU and ECB?”
As long as a bank has adequate capital and adequate collateral, the ECB should be willing to lend to it. If we assume that a bank would normally be able to borrow about 50% of its assets, then the limit on borrowing from the ECB would be about 200% of GDP (30-35 billion euros). At the end of January, total ECB loans to Cyprus banks stood at 9.1 billion euros (slightly over 50% of GDP), but now I think it must be closer to 100%, so there must be still a reserve of about 100% of GDP. As for the government, if we add the outstanding loan from Russia (2.5 billion euros) and the Eurozone rescue package (10 billion euros at 2.5-2.7% repayable in 12 years, with a grace period of 10 years, according to the latest government info), that would add up to a total external financing of about 75% of GDP.
“Have you thought about the best course of action for Cyprus once the unilateral transfers stop, the country must finance itself and its own current account?”
In one of my previous comments I described a scenario where Cyprus balances its trade in about five-years’ time (with zero economic growth), so that’s one possible answer.
“I agree with you that, so long as the ECB is happily financing a substantial CA deficit, it causes less short-term disruption for the Cypriot economy to keep adding debt. If this is debt on which the country eventually defaults, then this is basically free consumption courtesy of other EU taxpayers”
In the short-term, the Troika is supposed to make sure that the level of debt is sustainable (using forecasting models they have). In the long-term, nobody knows what level of debt is sustainable – it depends mostly on global economic trends – and a default is certainly possible, but we’ll cross that bridge when we get to it.
Ok, I’m done.
Nick, there is no need to recover my comment from the spam filter – I already posted its contents as two separate comments.
Simon,
1. Your bad shape
May I remind you, that it is you only who said “bad shape”, certainly not the Austrian Central bank at your link. Preceded by your speculation about “bank run elsewhere in the Euro zone”
http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/03/deposit-insurance-bank-runs-international-currencies-and-the-inflation-tax.html?cid=6a00d83451688169e2017ee972f16a970d#comment-6a00d83451688169e2017ee972f16a970d
The link you gave
Click to access facts_on_austria_e_jaenner_2013_screen_tcm16-235433.pdf
Says:
“These differentials imply a great potential for above-average growth, not only for the CESEE region, but also for the countries with which the region maintains close relations. Thanks to its geographical proximity and its traditionally strong ties with the region, Austria and its economy (including the banking sector) are in an excellent position to benefit particularly from this growth process.”
To whom does this sound like “in bad shape”?
I was helpful to you there, and provided the relevant links and numbers, together with the context to interpret them.
2. Financial data of Austrian banks
That their balance sheets look good, and better than in comparison American competitors, like C, BAC, and I can read and understand them, does not mean that I have to invest there.
3. Criminal default on loans
Your “If this is debt on which the country eventually defaults, then this is basically free consumption courtesy of other EU taxpayers.”, Taking an aid credit from the people of Europe, with the intent to not repay it, would be seen here as “Anstiftung” § 26 StGB to “Kreditbetrug” § 265b. 3 years jail. Here Professors pledge to uphold the law.
4. IMF / Troika 120% limit
Because we know that some weak characters might feel the temptation to default on their debt, the amount is limited, to make sure, that they know, that defaulting would hurt them more than any imagined benefit.
Doc Why: I fished it out anyway, to try to train the spam filter not to make mistakes like that.
For the hard of thinking, here’s my original post (thank-you Genny for your unflaggin interest in it) on Austria. (Boldface added)
The Austrian central bank’s homepage has a nifty report from January 2013 “Facts on Austria and Its Banks” (http://oenb.at/en/img/facts_on_austria_e_jaenner_2013_screen_tcm16-235433.pdf)
In a nutshell, it seems to say
– the Austrian economy is in great shape, thank-you very much.
– Austrian banks continue to be in bad shape due to large loan in CESEE (Central, Eastern and South-Eastern Europe.)
Some quotes from their executive summary:
Austrian Banks Face Crisis-Induced Challenges
• …the operating performance has been weak, reflecting the continued adverse conditions that result from the ongoing sovereign debt problems.
• The capital positions of domestic banks, while having improved further in the past year,
remain below international averages …
• The exposure of the majority-Austrian-owned domestic banks to Central, Eastern and
Southeastern Europe (CESEE1) came to EUR 215.5 billion in June 2012. This exposure,
while still comparatively high, is broadly diversified across the region.
• Compared with Austrian banks’ domestic banking business, the operations of their CESEE
subsidiaries are fraught with higher risks, as is reflected above all by high loan loss provisions.
At the same time, the CESEE-related operations have also been generating higher profits
than the domestic banking operations and thus remain a key profit driver for the Austrian
banking system.
• Foreign currency lending by Austrian banks has been curbed sharply in Austria and has also
gone down in the CESEE area. This notwithstanding, Austrian banks continue to have high
amounts of outstanding foreign currency loans in their books.
From their statistical summary, Austrian banks’ exposure to CESEE is about 2.5x the total capital of the banking sector and about 2/3 of Austrian GDP. (Austria has about a 75% Govt. debt/GDP ratio.)
Not great, but could be worse.
How’s Ireland doing?
Genny:
First, you say you understand Austrian banks well enough to understand their risk (or that’s what I understood from your attemps to correct their regulator!)
Then you say that you don’t invest in them because you follow the Buffet and do invest in what you do not understand.
Now you say you understand them (again!) but choose not to invest there, all the while (apparently) trying to prove that they are great investments.
How very interesting. I can’t imagine what you will say next!
“Your “If this is debt on which the country eventually defaults, then this is basically free consumption courtesy of other EU taxpayers.”, Taking an aid credit from the people of Europe, with the intent to not repay it, would be seen here as “Anstiftung” § 26 StGB to “Kreditbetrug” § 265b. 3 years jail. Here Professors pledge to uphold the law.”
Debt defaults are what they are. If you would like to criminalize economic analysis, perhaps a Canadian blog was not a wise choice of location for you to do so. Don’t you think German taxpayers should be aware of the tempetation facing Cypriots? I understood that German politicians were already making such comments. If so, have you proposed jailing them? (I ask only for information…..)
Speaking of defaulting on the repayment of foreign debts….what do they teach in German schools these days on the German abrogation of war reparations stipulated under the Treaty of Versailles?
Again, I ask only for information……
Simon,
1. Bad shape
in case you forgot, please look back, after you wrote the citation above(March 17, 2013 at 06:32 PM),
I took issue with your “bad shape”, and you wrote (March 17, 2013 at 07:13 PM)
‘ Genauer; This is not “my “in bad shape””. This is “my saying that the OENB says “in bad shape””. ‘
I did not “correct their regulator”, I cited him from the same source, here above and asked the audience ‘To whom does this sound like “in bad shape”? ‘
2.
I said the balance sheets of their banks are alright, and their credit quality is good, but that does not mean “great investment”.
3. IMF 120 % rule
You are certainly not the only one, who constantly try to project on “German politicians”, what is IMF / EU line, of which Germany is only a small part. Your “temptation” question I already answered above.
4. Versailles
As a child I was told that story probably very similar to you: Germany all bad. And that in 1948 – 1956, with the founding of the European Community, the London Debt Agreement, and the full NATO membership of Western Germany, people drew a firm line under all this, and look forward.
Now you come 60 years later, and want to discuss again the 100 years ago, like others try as well. This is practically always followed by an emotional rampage and threats and demands. I am not going there.
5. Krugman
You said, you wanted to pick up my challenge:
“I am still waiting for one single positive response to my old question: Please tell me one specific Krugman PAPER, and in a very few sentences, what YOU specifically find good about it.”
And then you spent a lot of words avoiding that. Ignoring at first, that I cant discuss a text I do not have in my hands, seeing inconsistencies when I mention 3-page Letter publications.
These kinds of “misunderstandings” are somewhat accumulating here.
Have you thought about taking the text here to a person you trust, and talk through, what kind of impression that here leaves?